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The Macro Situation

cake (noun)

• a flour-based dessert usually topped with icing;

• economically, a Zen koan of “having it” and “eating it, too”.

                                             ― New Entry in the Updated Devil’s Dictionary

Did someone mention soft landing? Perhaps. Perhaps not.

This week has been marked by indications that the jobs market is weakening amidst a somewhat strong economy, at least through Q2.

Signs of contraction:

• Job openings dipped in June to 8.18 million versus 8.23 million in May.

• The ADP report, which measures the payroll data of more than 25 million US employees, noted the smallest gain in July over 6 months. Only 122,000 jobs were added.

• Jobless numbers reached a one-year high last week with numbers growing from 235,000 the previous week to 249,000.

• According to the Bureau of Labor Statistics, the number of jobs added in July was significantly less (114,000) than the expected 175,000.

• The unemployment rate has risen to 4.3%, its highest since October 2021.

• Wage growth has slowed to 3.6% from 3.9% in June.

Signs of strength:

• US labor productivity, which measures labor output per hour, was revised up for Q2. The new figure is an increase of 0.4%, resulting in a 2.3% annual rate.

• Consumer confidence rose from 97.8 last month to 100.3 on the perception that economic conditions have improved.

There’s been a lot of talk about the Sahm Rule, developed by Claudia Sahm, who is a consultant and former Federal Reserve economist. The Sahm Rule states that the early stages of a recession might be happening when the three-month moving average of the national unemployment rate rises by at least 0.5 percentage points above its lowest point during the previous 12 months.

As you can see below from the St. Louis Federal Reserve real-time tracker, the rule triggered with the rate at 0.53.

The rule is not intended for forecasting, and Sahm herself has commented that based on the real-time data, a recession is NOT imminent.

At the time of writing, the Fed Watch tool, which tracks the prices of various futures contracts related to interest rates (particularly the federal funds rate), estimates the chances of a rate cut in September are 69% for 25bps and 31% for 50bps.

Up to the week ending on July 26, 2024, the ANFCI increased to -0.51 from -0.52 the previous week, indicating a good financial climate for investment.

Core Assets Update

Gold (2486.10) rose after the market priced in more aggressive and definitive rate cuts. The US dollar (103.22) has correspondingly weakened.

Crude Oil (74.14) spiked midweek due to escalated tensions in the Middle East with the assassination of the Hamas leader Ismail Haniyeh. Friday saw the price of oil drop by as much as 6.8% due to fears of recession (since there is less demand for oil in a recession).

The 10-year Treasury yield (3.799%) tumbled on the reassessment of new rate cuts. The spread between to the 10-2 year treasury yields, which was at -9bps at the time of writing, inched closer to positive territory. According to Davide Barbuscia of the Associated Press, the yield curve turned positive a few months before the economy started contracting in the last four recessions. But this signal hasn't triggered yet.

                                             -Todd Mei, PhD and Sebastian Purcell, PhD